PKF worldwide tax update - SEPTEMBER 2020 PKF International Limited
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PKF International Limited PKF worldwide tax update SEPTEMBER 2020
Contents
AUSTRIA LUXEMBOURG
Guidelines for the application and Non-deductibility of interest and
interpretation of double tax treaties further royalties paid to group entities located in
to COVID-19. blacklisted countries.
BELGIUM Upcoming modification of withholding tax
Antwerp Court rules that Dutch expatriate rates on dividends and interests between
tax allowances are also tax-free in Belgium. Luxembourg and Russia.
One-off tax loss carry-back. Upcoming changes for securitisation vehicles.
BULGARIA Possible switch from a vertical to a horizontal
Introduction of reduced VAT rate for books, tax unity regime in Luxembourg.
restaurant and catering services further to
MEXICO
COVID-19.
New Tax Scheme for Digital Platforms.
CHILE
NEPAL
New VAT measures enacted.
Major amendments to direct & indirect tax
CHINA laws as per the Finance Act 2020.
How to declare corporate income tax Major amnesties announced by Finance
under the WFOE and Branch Office Model Act 2020.
in China.
Eligible deduction on contribution to Social
Tax treatment of cross-border royalty Security Fund.
payments in China.
POLAND
CYPRUS Mandatory Disclosure Rules (MDR) in Poland.
Notional interest deduction
provisions amended. RWANDA
Changes to the Quarterly Instalment
ECUADOR Tax Regime.
Tax reliefs to counteract COVID-19 induced
economic crisis. SOUTH AFRICA
National lockdown: are there tax implications
GERMANY if you remain in SA for an extended period
Check-the-box in Germany: Partnerships of time?
can opt for corporate income tax in
the future. SWITZERLAND
Tax developments in response to COVID-19.
HONG KONG
COVID-19 stimulus packages provided by TURKEY
the HK Government. Recent international treaty developments.
HUNGARY UKRAINE
Introduction of a special retail tax. 2020 Ukrainian Tax Reform – BEPS measures
have been adopted.
INDIA
Recent tax developments. UNITED ARAB EMIRATES
Updates on economic substance regulations,
ITALY CbC Reporting, and VAT and excise tax.
Nautical charter services: VAT territoriality.
UNITED KINGDOM
JAMAICA Stamp Duty Land Tax: Summer
2020 tax updates. economic update.
KENYA UNITED STATES
Tax Laws (Amendment) Act, 2020. IRS guidance related to dual consolidated
loss rules and establishing a foreign branch.
IRS Transfer Pricing Compliance Activities.
1
Welcome In this third quarterly issue for 2020, the PKF Worldwide Tax Update newsletter again brings together notable tax changes and amendments from around the world, with each followed by a PKF commentary which provides further insight and information on the matters discussed. PKF is a global network with 400 offices, operating in over 150 countries across our 5 regions. Our tax experts specialise in providing high quality tax advisory services to international and domestic organisations in all our markets. This issue features articles on: • COVID-19 tax measures and guidelines in Austria, Bulgaria, Ecuador, Hong Kong, South Africa and Switzerland. • DAC6 (reporting of cross-border tax arrangements) in Poland. • VAT developments in Bulgaria, Chile, Italy, Nepal and Mexico. • Double tax treaty updates and related case law in Austria, Belgium, China, India, Luxembourg and Turkey. • Recent comprehensive tax changes in Jamaica, Kenya and Nepal. • International tax developments (CbC Reporting, BEPS, Transfer Pricing) in the UAE Ukraine and the U.S. We trust you find this update informative and interesting. Please do contact the PKF tax expert directly (mentioned at the foot of the respective PKF Commentary) should you wish to discuss any tax matter further or, alternatively, please contact any PKF firm (by country) at www.pkf.com/pkf-firms. 2020/21 Worldwide Tax Guide The latest PKF Worldwide Tax Guide features 146 jurisdictions. Its resounding success is a result of the energy, time and support of individuals and firms within the PKF family. We thank you all for your support. We are extremely grateful to all those who have provided country submissions, and to each person who has supported this very marketable and impressive publication. PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 2
Austria
Guidelines for the application
and interpretation of double tax
provision modelled on Art 15 OECD-MA based on
treaties further to COVID-19
the principle of causality in the country in which
On 22 May 2020, the Austrian Minister of Finance the activity to which they relate to would have been
announced some guidelines for the application and carried out. If a DTT contains a separate provision
interpretation of double tax treaties (DTTs) in light of for income from statutory social insurance or similar
the COVID-19 pandemic: income, remuneration for short-time work is not
covered under Art 15 OECD-MA, but basically falls
under the respective special provision of the DTT,
Salaries in connection with activities performed
which usually gives the right to tax to the state of the
in the home office
allocated health insurance fund.
• DTT with Art. 15 clause corresponding to OECD-
MA (taxation based on the place of employment Permanent establishment
principle): treatment of salaries for cross-border
If an Austrian-based employee of a company
employees in accordance with DTT; any bilateral
domiciled abroad performs work out of the home
consultation agreements take priority.
office during the COVID-19 pandemic, this will be
• Consultation agreement with Germany: COVID- considered force majeure and will, in principle,
19-related home office days are deemed to be not create a permanent establishment within the
exercised in the “normal country of activity”; for meaning of Art 5 OECD-MA at the level of the
cross-border commuters, these do not count as foreign company.
days of non-return.
• Cross-border commuter regulation with Construction work and assembly
Liechtenstein: people who were previously With regard to construction work or assembly, a
classified as cross-border commuters because permanent establishment under regular law is only
they commuted “usually every working day” established when its duration exceeds a certain
but now work from their home office to curb the period - usually twelve months. If the construction or
further spread of the COVID-19 pandemic do not assembly is temporarily interrupted, these periods
lose their cross-border commuter status. should always be included in the calculation of the
threshold. If there are temporary interruptions due to
Short-time work benefits the COVID-19 pandemic, these do not - in principle,
Short-time work benefits paid by an employer to subject to any deviating bilateral agreement - lead to
his employee are taxable within the scope of a a suspension of the threshold.
PKF COMMENT
The COVID-19 pandemic might also impact the application and interpretation of international treaties. For
some cases, the Austrian government recently issued guidelines principally considering the pandemic as an
(unpredicted) exceptional situation, which should allow flexible handling of existing DTT clauses. For further
information or advice please contact Thomas Ausserlechner at thomas.ausserlechner@pkf.at or
call +43 1 512 87 80.
»BACK
PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 3
Belgium
as compensation for incurring specific expatriate
Antwerp Court rules that Dutch costs. Such costs include, among others, double
expatriate tax allowances are also housing costs, home country travelling costs,
storage of furniture costs, additional costs of living
tax-free in Belgium incurred because prices in the Netherlands are
On 26 November 2019, the Antwerp Court of Appeal higher than those in the home country, and costs
rendered its decision concerning the classification incurred in having official documents drawn up. The
for Belgium personal tax purposes of the 30% taxpayer concerned was employed as an expatriate
expatriate costs compensation under the Dutch 30% in the Netherlands in 2013 and 2014. As such, he
ruling (“the 30% ruling”). was entitled to the 30% ruling implying that 30%
of his salary was tax-exempt in the Netherlands as
compensation for extraterritorial costs. The taxpayer
Under the 30% ruling, highly qualified employees
did not declare the 30% costs compensation when
temporarily assigned to the Netherlands are entitled
filing his Belgian personal tax returns. However, the
to receive 30% of their employment income tax-free
Belgian tax authorities took the view that the 30%
costs compensation should have been declared
because it constituted a hidden salary payment. The
taxpayer then appealed that decision.
Summarised, the Antwerp Court stated that the
Belgian tax authorities can only tax business
costs compensation if they demonstrate that the
compensation constitutes a hidden salary payment.
However, in the case at hand, the Belgium tax
authorities did not provide that evidence. As a
result, the Court of Appeal was of the opinion that
the Belgium tax authorities had not refuted the
presumption that the 30% cost compensation is
not taxable. Therefore, the Court of Appeal decided
in favour of the taxpayer and held that the exempt
compensation of up to 30% of the salary paid
constitutes a compensation for extraterritorial costs
incurred by expatriates in the Netherlands, which
does not have to be declared as taxable salary
in Belgium.
PKF COMMENT
This case law is a clear example of a case where the Belgium tax authorities unrightfully tried to reverse the
burden of proof to the taxpayer. It is therefore highly welcomed that the Antwerp Court applied Belgium tax
procedure in a strict and correct way and ruled in favour of the taxpayer. If you believe the above ruling may
impact your personal situation or require any advice with respect to Belgium taxation, do not hesitate to contact
Kurt De Haen at kurt.dehaen@pkf-vmb.be or call +32 2 460 0960.
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PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 4
• The Belgium corporate tax rate has decreased
from 29.58% to 25% with respect to financial
years 2019 and 2020. As the carry-back of tax
losses may not lead to positive tax arbitrage, the
2020 taxable basis will be adjusted to neutralise
One-off tax loss carry-back the difference in corporate tax rates.
• The Belgium company at hand may have made
Belgium tax legislation does not feature a tax loss
advance tax payments in 2019 which may now
carry-back rule. Tax losses can only be carried-
end up being pointless or excessive because of
forward, without limitation in terms of time and
the use of carry-back tax losses. As such, this
amount. However, the corona crisis struck hard
should not lead to adverse tax consequences as
resulting in many companies incurring current-year
the company will get the excessive advance tax
losses related to FY 2020.
payments refunded (be it interest-free)
within two months as from the date of the
In particular, in order to support companies from assessment notice.
a cash-flow perspective, they are allowed to
• There is no impact on the BE GAAP annual
exceptionally carry-back the “expected” 2020 tax
accounts of the financial year 2019 which are
losses in order to offset them against FY 2019 (tax
finalised already. Indeed, a tax saving should
assessment year 2020) taxable profit. The Belgium
only be recorded in the profit and loss account
corporate tax return for the tax year 2020 is to be
of the financial year in which the tax loss has
filed in principle by 24 September 2020. As a result,
been incurred, i.e. financial year 2020.
the 2019 Belgium corporate tax liability decreases
for eligible taxpayers. Hereafter, you will find some • However, if the company proceeded to a
best-practice guidelines in this respect: dividend distribution, a capital reduction or a
redemption of own shares in the period between
• When making use of the carry-back of tax 12 March 2020 and the moment when the
loss rule, no BE GAAP accounting entries are corporate tax return for the tax year 2021 is filed,
required. Only the appropriate boxes of the “tax- it cannot make use of the carry-back of tax loss
free reserves” as laid down in the corporate tax rule. The same applies to a company which has
return of the tax year 2020 need to be a shareholding in a company located in a tax
duly completed. haven or to a company making tainted payments
• The financial year 2020 is obviously still running. exceeding EUR 100,000 to a beneficiary residing
That is why the “expected” tax losses of this in a tax haven.
financial year need to be estimated as accurately • For completeness’ sake, the carry-back of tax
as possible. This is important, because if it loss rule can be combined with Belgium group
appears after that the actual tax loss is less than relief for corporate tax purposes. Needless to
90% of the estimated tax loss, additional tax will say, this requires careful tailored planning, but
be due on the difference. The tax rate will range also offers interesting opportunities.
from 2%-40% depending on the difference. The
bigger the difference, the higher the tax rate.
PKF COMMENT
The introduction of the exceptional tax loss carry-back rule is fairly unique in Belgium but is nevertheless highly
welcomed by taxpayers under the current delicate economic circumstances. Those who want to make use of
this rule should do so by duly completing their Belgium corporate tax return for the tax year 2020. For further
details, please contact Kurt De Haen at kurt.dehaen@pkf-vmb.be or call +32 2 460 0960.
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PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 5
Bulgaria
Introduction of reduced VAT
rate for books, restaurant and
catering services further to
COVID-19
In early June 2020, changes to the Bulgarian VAT
Act were announced encompassing a 9% reduced
VAT rate for the sale of books (including e-versions),
restaurant and catering services (excluding alcoholic
beverages), as well as for baby foods and products.
The reduced rate for the abovementioned goods and
services is temporary and will apply from 1 July 2020
to 31 December 2021.
PKF COMMENT
The tax consultancy team of PKF Bulgaria has
substantial knowledge and expertise and can
provide assistance at each stage of Bulgarian tax
planning and compliance procedures to both foreign
and local individuals. We have successfully consulted
our PKF clients who operate in various fields of
business on how to be compliant with the rapid
changes of the tax legislation in the everchanging
business environment. For further information or
advice concerning Bulgarian tax planning, please
contact Venzi Vassilev at venzi.vassilev@pkf.bg or call
+359 2439 4242.
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PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 6
Chile
New VAT measures enacted • They can apply for foreign currency tax
calculation and payment
The Tax Reform Package has modified the VAT Act
• They do not have to issue invoices controlled by
by subjecting digital services, and the like, rendered
the Chilean IRS.
by non-resident companies to a 19% VAT rate. That
means that these companies have to charge the
Non-resident companies have to charge VAT on
19% rate to the price of their services. The following
service prices, unless the customer gives them
are the new services subject to VAT as from
notice that it is a Chilean VAT taxpayer, in which case
1 June 2020:
the VAT will be withheld by that taxpayer.
• Intermediation of services provided in Chile,
whatever their nature, or of sales made in
Chile or abroad whenever the latter give rise to
an import
• The provision of digital entertainment content,
such as videos, music, games or other
analogues, through download, streaming or
other technology, including texts, magazines,
newspapers and digital entertainment books
• Making available software, storage, platforms or
computer infrastructure
• Advertising, regardless of the medium
or medium through which it is delivered,
materialised or executed.
When the abovementioned services are rendered to
consumers (B2C), the law states that non-resident
companies must register with the Chilean IRS and
will be subject to a special regime to allocate and
pay the VAT return. Some of the rules making the tax
compliance easier for them are as follows:
• Companies can choose to file the VAT return and
pay the tax monthly or every calendar quarter
PKF COMMENT
The Chilean IRS may designate credit card issuers, debit card issuers or other similar payment systems as
withholding agents by way of assuming the taxable person’s obligations. Another important aspect is that the
software impacted by these measures will not be subject to VAT.
If you believe the above measures may impact your business or require any advice with respect to Chile
taxation, please contact Antonio Melys Alvarez at amelys@pkfchile.cl or call +56 22650 4332.
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PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 7
China
How to declare corporate income employees. The profit and loss of a branch office
could be consolidated at the head office level.
tax under the WFOE and branch Hence, this model could be a good choice to expand
office model in China business throughout China rapidly and easily.
What is the WFOE and branch office model?
However, there are disadvantages to the branch
The WFOE (“Wholly Foreign Owned Enterprise”) and
office model as well. Its business scope is limited to
branch office model means that after a WFOE is
the head office’s business scope, it cannot export
established in China, it could then open its branch
or import on its own, and the head office is liable
offices in different regions of China, and the WFOE
for activities performed by the branch office as the
will become the head office of those branch offices.
branch office is not an independent legal entity.
Tax administration for the branch office
A new branch office must be registered with the
local tax bureau within 30 days after obtaining
the business licence and report its head office’s
information as well, after which, the branch office
will have a tax ID and is able to issue invoices to
its customers. The branch office needs to declare
VAT locally, on a monthly or quarterly basis, which
is similar to what a WFOE does. For most of the
taxes, for example, individual income tax, and stamp
duty etc., the same tax declaration requirements
are applied to a branch office, except for Corporate
Income Tax (“CIT”).
How to pay CIT under the WFOE and branch
office model
China CIT is levied on each legal entity purpose,
so a head office and its branches need to calculate
CIT on a consolidated basis. This means the loss
and profit of a head office and branches are added
together to reach a tax payable amount.
According to PRC Tax Regulation, SAT [2012]
Bulletin 57, the WFOE and its branch offices
located in different regions should pay CIT to
the local tax authorities respectively in their own
The process of setting up a branch office is easier
registered locations on the basis of the following
and less expensive than setting up a new WFOE.
allocation method:
Apart from that, the branch does not require
registered capital, while the head office needs a • The head office will first consolidate and
capital contribution. Since a branch office has its calculate the taxable profit and CIT payable
own business license and seal, it could sign off of itself and its branches as a whole for both
on business contracts on its own behalf and hire quarterly and annual filing purposes
PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 8
• For each quarterly filing, 50% of the tax payable Nevertheless, the following types of branch offices
will be allocated to the branches and 50% to could be exempt from making CIT payments locally
the head office. The allocation proportion under the WFOE and branch office model:
among the branches is calculated based
• Branch offices that only have auxiliary functions
on three factors of the previous year, i.e.
(e.g. after-sales services, internal research and
operating revenue, total assets and employee
development, warehousing)
remuneration, with the weighting index at 0.35,
0.3 and 0.35 respectively. • The first year of a newly established branch
• Proportion of tax payment allocated to a single • The head office is recognised as a small-scale
branch= 0.35*(amount of operating revenue enterprise in the previous year
of a branch/amount of total operating revenue
• Wound-up branch offices after the tax de-
of all branches) + 0.35*(amount of employee
registration formalities are duly completed.
remuneration of the branch/ amount of total
employee remuneration of all branches) +
0.3*(total assets of the branch/total assets of
all branches).
• Tax payment amount for a branch equals
the total tax payable of the company* 50% *
proportion of tax payment allocated to this
single branch.
• For CIT annual settlement before 31 May of
the next year, the head office and the branches
shall pay their own under-paid CIT or claim
CIT refund/offsetting for over-paid CIT with its
respective in-charge tax bureau based on
the above consolidation calculation and
allocation method.
PKF COMMENT
• The WFOE and branch office model may be an easier way to expand business in China. However, there are
also other options; setting up new WFOEs, or a representative office etc. Each structure has its own pros
and cons, so foreign investors may want to plan carefully in order to find the appropriate and tax-effective
structure for their business.
• A branch office may be an efficient vehicle to hold part of the functions of a company at a specific location
to meet the business development needs in future.
• The CIT allocation method is quite complex and if the branch offices might have to deal with different local
tax practices in different regions. It is suggested to well understand the related tax regulations and local
practices before the CIT declaration or seek the help from tax professionals
• It is important to calculate the allocation proportion correctly, because it will affect all the CIT payments
among branches.
If you believe the above may impact your business or require any advice with respect to China taxation, please
contact Allan Jiang at allan.jiang@pkfchina.com or call +86 21 6076 0876.
»BACK
PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 9Tax treatment of cross-border contribution, the tax authority can carry out a tax
audit to impose a tax adjustment any time within
royalty payments in China 10 years from the date of the transaction. The
adjustment may result in the payment not being
Nowadays, more and more multinational companies
allowed for EIT deduction at the level of the
(“MNCs”) offer know-how, technology, process
Chinese enterprise.
techniques, trademarks, brands etc to their invested
companies in China and consider royalty payments
as an effective way for repatriating profits out of (4) Tax Treaty Benefits
China. However, it may also entail tax risks if such China has entered into double tax treaties
arrangements fail to comply with China tax laws. (“DTTs”) with more than 100 tax jurisdictions,
and certain DTAs offer favourable withholding
Tax implications of cross-border royalty payments tax rates on royalties paid by Chinese
(1) Withholding Income Tax enterprises to non-resident enterprises. For
example, a withholding income tax rate of 7%,
Royalties derived from a Chinese enterprise by rather than 10% tax rate under the China-Hong
a non-resident enterprise are subject to China Kong DTT.
Enterprise Income Tax (“EIT”) on a withholding
basis at the current 10% rate (the standard
rate is 20% according to China EIT Law), If the DTT benefits are applicable to royalty
which could be further reduced subject to the payments, then the non-resident enterprise,
application of a double tax treaty. When the when qualifying as the beneficial owner, can
royalty payment is due according to the relevant enjoy preferential withholding tax rates upon
contract, the tax withholding obligation arises at withholding tax filing without pre-approval from
the level of the Chinese enterprise making the tax bureaus. However, the tax bureau will
the payment. scrutinise the application afterwards and the
following materials should be submitted to the
tax authorities:
(2) Withholding Value Added Tax (“VAT”)
and Surcharges • Tax resident certificate of non-
resident enterprise
The payment of royalties would also be subject
to VAT at a standard rate of 6%, as well as • Payment receipt, contracts or agreements
surcharges (urban construction and maintenance regarding the royalty payment
taxes, education surcharge, and local education • Documents that can prove the non-resident
surcharge). which shall also be withheld by the enterprise is the beneficial owner of
Chinese enterprise at the time of remittance. the royalties.
The 6% VAT can be claimed as VAT input by
the Chinese enterprise to offset against its VAT
payables if it is a general VAT taxpayer in China.
(3) Transfer Pricing Regulations
China implemented transfer pricing regulations
many years ago and the principles are
consistent with OECD guidelines, such as
the arm’s length principle to be adhered by
regarding transactions between an enterprise
and its related party. If a payment made to a
related party overseas is found to be not in
accordance with the arms-length principle or
the profit distribution does not match the value
PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 10China tax regulations also offer safe harbour rules to
qualify for beneficial ownership, the assessment of
which would be determined on a case by case basis.
Tax risks of cross-border royalty payments
In recent years, royalty payments to related parties
have been a main target of tax audits. We summarise
the key areas from those audit cases hereafter:
1. Many MNCs have production subsidiaries in
China that operate at a reasonable level of gross
profit margin, but have consistently experienced
year-over-year losses or marginal profits in net
profit. The reason for this is mainly due to the
payment of large royalties to offshore affiliates
2. Domestic enterprises that have made a special
contribution to the value of the technologies or
(5) Beneficial Owner Assessment on the technologies themselves have devalued and
Royalties Payment they still pay high royalties to offshore affiliates
The non-resident enterprise will not qualify as a 3. Royalties paid to offshore affiliates registered in
beneficial owner, if it does any of the following. tax havens or tax jurisdictions offering
DTT benefits
• The recipient pays more than 50% of the
income to a resident(s) of a third jurisdiction 4. Royalties paid to the mere owner of certain
within 12 months after it receives the income intangible assets (which owner actually makes
no contribution to the value of usage of the
• The business activities carried out by the
intangible assets) may not constitute business
recipient of the income do not qualify as
substance to the royalty payment
substantive business activities, including
substantive manufacturing, trading and 5. High and new technology enterprises that are
management activities. Whether the supposed to own their own core technology
recipient has carried out substantive while they still pay huge technology-related
business activities will be judged based on royalties to offshore affiliates
the functions performed and risks assumed 6. Related parties change the payment of royalties
by the recipient. Substantive investment into the payment of technical services. Instead
management activities can qualify as of charging royalty payments, the overseas
substantive business activities companies may charge technical services
• The recipient is exempt from tax on the and justify that most of the services are
relevant income or the income is not taxable provided outside China. According to China
in the residence jurisdiction, and if the tax regulations, royalty-related services such
income is taxable, the effective tax rate is as training and support services could also be
extremely low considered royalty payments.
• A licence or transfer agreement exists
China’s tax authorities would investigate whether
between the non-resident and a third party
royalty payments are made based on the arm’s-
relating to the transfer of the ownership
length principle, and if the recipient has business
of, or right to use, the copyright, patent
substance or not. If the royalty payments do not
or technology covered by the licence
match the economic benefits they generate, the tax
agreement, based on which a royalty is
authorities could make special tax adjustments to
derived and paid.
PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 11said payments. Also, the royalty payment lacking
business substance might not be considered a
deductible item for EIT purposes at the level of the
Chinese subsidiary.
When the royalty payment is related to imported
goods, it may also trigger import customs duties
and import VAT. This potential risk is to be further
analysed on a case by case basis.
PKF COMMENT
Regarding cross-border royalty payments, MNCs are advised to revisit their transfer pricing policies and
supporting documents to enjoy tax treaty benefits and should be fully prepared in order to ensure tax efficiency
and manage related tax risks at the same time.
Since royalty tax treatment may involve the assessment of tax treaty application and may also be related to
differentiation between pure labour service and royalty, permanent establishment assessment, as well as import
taxes, tax professionals can be of assistance to MNCs in order to more accurately assess their tax implications
when deriving royalties from China, and to properly optimise favourable tax policies when structuring
royalty transactions.
If you believe the above may impact your business or require any advice with respect to China taxation, please
contact Allan Jiang at allan.jiang@pkfchina.com or call +86 21 6076 0876.
»BACK
Cyprus
Notional interest deduction In brief, the NID is equal to the amount of the new
equity introduced for business purposes multiplied
provisions amended by the relevant “reference rate”, subject to an annual
cap of 80% of the taxable profits (as calculated prior
On 16 June 2020, the provisions of the Notional
to the NID) arising from the new equity.
Interest Deduction (NID) on new equity used for the
production of taxable income were amended.
New Provisions
Background (a) Reference rate
As from 1 January 2015, Cyprus tax resident entities Until 31 December 2019
were entitled to deduct from their taxable profits, The reference rate was the yield of the 10-
a notional interest (NID) arising out of new equity year government bond (as at 31 December
introduced which produces taxable income. This of the year preceding the tax year the NID is
NID is subject to a number of conditions including a claimed) of the country in which the new equity
taxable income limitation. is employed/invested plus 3%. The minimum
reference rate was the yield of the Cyprus 10-
year government bond (as at 31 December of
the relevant year) plus 3%.
PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 12From 1 January 2020 “New equity” is now defined as equity
As of 1 January 2020, the relevant 10-year introduced into the business on or after 1
government bond yield will no longer be January 2015. Therefore, as from 1 January
determined by taking the higher of: (i) the Cyprus 2021, the NID can no longer be claimed on
yield rate; and (ii) the yield of the country in equity arising from the capitalisation of reserves
which the new equity is invested into. existing on 31 December 2014 regardless of
whether such equity is funding new
Instead, the 10-year government bond yield
business assets.
will be determined only with reference to the
jurisdiction of investment (i.e. the Cypriot yield
rate will no longer serve as a minimum). (c) 80% Restriction
A clarification on the calculation of the 80%
The reference rate is the yield of the 10-year restriction, in that the relevant taxable profits
government bond (as at 31 December of are those relating to the new equity, so that the
the year preceding the tax year the NID is NID can only be claimed against such profits. It
claimed) of the country where the new equity also clarifies that the cap applies separately to
is employed/invested plus 5%, and there is no the taxable profits derived from each business
minimum reference rate. asset that is financed by the new equity (i.e. 80%
restriction should apply separately to the taxable
income arising from each business asset which is
In case the country in which the new equity is
financed by new equity).
invested into has not issued a government bond
on 31 December of the year preceding the tax
year, the “reference interest rate” will be based If tax losses arise from the use of new equity into
on the government bond yield of Cyprus the business, no NID should be available in the
plus 5%. relevant year.
(b) New Equity The amendments for the 80% restriction will apply
retroactively as from 1 January 2015.
Under the existing provisions, “new equity”
refers to any equity introduced into the business
on or after 1 January 2015 and used for
producing taxable income but excludes any
equity created from the capitalisation of reserves
existing on 31 December 2014. An exception to
this exclusion rule is when the capitalisation of
such “old” reserves creates new business assets
which did not exist on 31 December 2014.
PKF COMMENT
The amendments provide additional incentives to eliminate the thin capitalisation concept, by increasing the
notional interest reference rate and abolishing the restriction on pre-2015 profits’ eligibility of having been
capitalised into share capital.
For further information or advice on any Cyprus tax matter, please contact Nicholas Stavrinides at nicholas.s@
pkf.com.cy or call +357 258 68000.
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PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 13Ecuador
Tax reliefs to counteract COVID-
19-induced economic crisis
On 16 March 2020, President Lenin Moreno declared
the state of emergency due to the COVID-19
pandemic, suspending all non-essential economic
activity and forcing the population to go into
lockdown in an attempt to slow the spread.
To reduce the impact on taxpayers’ liquidity, the
government has since implemented the
following measures:
• Deferred payment of (i) VAT payable in April,
May and June 2020 and (ii) income tax for
year 2019, through six (6) instalments from the • Extended deadlines for administrative-tax
original submission deadline. This measure is processes and for the statute of limitations of
only applicable for micro, small and medium- tax-related debt collection.
sized companies; taxpayers domiciled in the
Galapagos islands; airline companies, taxpayers On 19 June 2020, the National Assembly approved
from the tourism and agriculture sector; and the “Law for Humanitarian Support”. Regarding
recurrent exporters and taxpayers deriving more tax matters, this Law includes benefits for financial
than 50% of their income from exporting goods entities providing productive loans to the private
• Extended deadlines for tax filing, which was sector in order to reactivate the economy and
originally due in March and April 2020 preserve employment.
PKF COMMENT
President Moreno finally obtained approval of the “Law for Humanitarian Support”, although not as he initially
intended to. His major setback was the exclusion of contributions to companies with earnings exceeding
USD 1 million and to individuals with monthly income exceeding USD 500. In recent interviews, the President
and top government officials declared that a Decree will be issued aiming at the advance payment of income
tax at the level of companies with earnings exceeding USD 5 million and that have not been affected by the
COVID-19 pandemic. Under the premise that “those earning more, should contribute more”, the resources
obtained from these contributions are intended to be allocated to credit lines and food supplies.
For further information or advice concerning tax amnesty or any advice with respect to Ecuador taxation, please
contact Edgar Naranjo at enaranjo@pkfecuador.com or call +593 4 236 7833.
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PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 14Germany
Check-the-box in Germany: 2.2 Fictional transformation of form
By exercising the option, the partnership is
Partnerships can opt for fictionally transformed into a corporation for
corporate income tax in income tax purposes. Shareholders are deemed
the future to be granted shares in a corporation, as in the
case of a change of legal form.
On 3 June 2020, Germany’s federal government
agreed on a comprehensive financial aid package
to stimulate and reinvigorate the economy, part of 3. Taxation after exercise of the option
which is an option model for partnerships. According 3.1 Qualification and determination of income
to this model, the shareholders can decide that After exercising the option, trade and corporate
a partnership will be treated as a corporation for tax principles for corporations are to be applied.
income tax purposes. In accordance with the separation principle,
the corporation and the shareholders now each
represent independent tax subjects. Contractual
1. Who can opt and how? relationships under the law of obligations (e.g.
The option is to be available for all partnerships that loan agreements) between the shareholder
generate income from business operations. The and the company are now recognised for tax
option is exercised by the shareholders passing a purposes. This also applies to shareholder-
resolution. Subsequently, the legal representatives manager contracts. The income is subsequently
have to file an application with the tax office. no longer considered business income, but
income from employment. Social insurance
obligations might arise.
2. Effects of the option
2.1 Scope of application
3.2 Distributions of profits
The resolution and the application to the tax
In the case of “normal” corporations, profits
office lead to the partnership being treated as a
generally remain in the company and are
corporation for income tax purposes.
recognised as retained earnings under equity.
Note: an option term of seven years must be
Only when the shareholders explicitly decide to
taken into account; only after this period is a re-
distribute all or part of the profit is capital gains
option for taxation as a partnership
tax (CGT) - a kind of withholding tax - to be paid
possible again.
and the net dividends are paid out or credited to
the shareholders’ accounts.
In contrast, the reverse is true for partnerships
even after exercising the option. The so-called
full distribution principle still applies. This means
that the company has to withhold CGT on all
taxed profits and the net dividend is credited
to the shareholders’ accounts. If a retention or
strengthening of equity capital is desired, there
must be a provision under company law that
profits are credited to a reserve account. Only in
this case will no CGT be levied on the
retained profits.
154. Exemplary comparison of tax burdens available to the shareholders. Only after a
The following assumptions are made: distribution has been passed is CGT to be
withheld and taxation to be carried out at the
• Partnership generates a taxable profit of
level of the shareholders, which, however, is
EUR 100,000
offset against CGT.
• Trade tax 13.3%, corporate income tax (CIT)
15%, income tax with a marginal tax rate of
5. Conclusion
42% and CGT 25% are taken into account
The example shows that the partnership does
• Tax allowances, church tax and solidarity not necessarily enjoy tax advantages if it opts for
surcharge are not included in the corporation tax. The advantage of the option model
calculations for reasons of simplification. is that a “company” level is also formed and that, in
the event of a retention, approximately EUR 13,700
A distinction is now made between three cases: less tax must initially be paid per EUR 100,000 of
(1) Taxation without option: income and stays available for internal financing.
It remains to be seen how the option model will be
tax of EUR 13,300 on the profit, the
specifically drafted in the further legislative process.
shareholder account is credited with EUR
86,700. Shareholders have taxable income
of EUR 100,000. Trade tax can be credited
against the income tax of EUR 42,000. So,
shareholders pay EUR 28,700.
Result: After taxes, shareholders have EUR
58,000 at their free disposal, the company
has zero.
(2) Taxation with option without retention:
The partnership owes EUR 13,300 trade
tax and EUR 15,000 CIT. Of the remaining
amount of EUR 71,700, the company has
to withhold EUR 17,925 CGT. Shareholders
have to tax EUR 71,700 as income from
capital assets; the tax is fully covered by the
creditable CGT.
Result: After taxes, EUR 53,775 remains at
the free disposal of the shareholders, zero
for the company.
(3) Taxation with option with retention:
The partnership owes EUR 13,300 trade tax
and EUR 15,000 CIT. EUR 71,700 can be
added to the reserves.
Result: In so far as taxed income is retained
at the level of the partnership, it is not
PKF COMMENT
If you believe any of the above measures may impact your business or require any advice with respect to
German taxation, please contact Daniel Scheffbuch at d.scheffbuch@pkf-wulf.de or call +49 711 69 767 238.
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PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 16Hong Kong
COVID-19 stimulus packages would be granted to eligible employers, subject to
certain conditions (e.g. undertaking to not implement
provided by the HK Government redundancies, restrictions on the wage subsidy
usage, etc.). Most of the subsidies and financial
The Legislative Council Finance Committee
assistances granted under the AEF are specifically
approved a second round of the Anti-epidemic Fund
exempt from the Hong Kong Profits Tax.
(“AEF”) stimulus package on 18 April 2020, granting
a budget of HKD 137.5 billion to specifically target
(i) job retention, job creation and job advancement;
(ii) sector-specific relief; (iii) reduction of financial
burden through governmental rental concessions,
fee waivers, provision of loans and loan repayment
deferrals; and (iv) other relief through government
facilitation. The first round of the AEF stimulus
package was approved in February 2020, in which
a budget of HKD 30 billion had been granted for
the purpose of enhancing the capabilities of the
government and other relevant parties to combat
the epidemic and to provide relief to members of the
public that were significantly affected by
the epidemic.
Various tax relief measures were granted, including
postponing the issuance of tax returns by one
month, the automatic extension of tax filing
deadlines which originally fall between March and
May 2020, and the 3-month postponement of tax
payments falling due in April to June 2020. One
of the focal points of the second round of the AEF
stimulus package is the Employment Support
Scheme (“ESS”), in which a monthly subsidy of up to
HKD 9,000 per employee (for a period of 6 months)
PKF COMMENT
Although the application period for the first tranche of the ESS wage subsidies has already lapsed on 14 June
2020, the application period for the second tranche of subsidies (i.e. the subsidy period for the second tranche
is from September to November 2020) is fast approaching. Please let us know if you have any questions on
your eligibility for the second tranche of ESS wage subsidies or require our assistance for the
application process.
For further information or advice concerning the above or any advice with respect to Hong Kong taxation,
please contact Henry Fung at henryfung@pkf-hk.com or call +852 2806 3822.
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PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 17Hungary
Introduction of a special retail tax retail activity in a business-like manner, including
where a foreign-registered person sells goods to its
Further to new legislation published on 9 June 2020, customers via channels other than a branch office
the special retail tax introduced by government in Hungary.
decree during the state of COVID emergency and
originally planned to be a temporary tax became a
The basis of the special retail tax is the net revenue
permanent feature of the Hungarian tax system.
(as defined in the decree) derived from the retail
activity. In certain cases, the net revenue of related
The tax liability applies to retail activity (specified by companies shall be aggregated and a progressive
NACE classes), and covers all transactions where tax rate shall be applied to this aggregate amount in
a domestic or a foreign person or entity carries out order to calculate the tax amount due. As a result,
the related taxable persons bear the calculated tax
burden in proportion to respective taxable income.
The tax rate is determined as follows:
• 0% on a taxable amount not exceeding HUF 500
million (approximately EUR 1.4 million)
• 0.1% on a taxable amount in excess of HUF
500 million but not exceeding HUF 30 billion
(approximately EUR 85 million)
• 0.4 % on a taxable amount in excess of HUF 30
billion but not exceeding HUF 100 billion
• 2.5 % on a taxable amount in excess of HUF
100 billion (approximately EUR 280 million).
Taxpayers have to record and pay tax instalments,
and the filing deadline of the yearly tax return is 31
May. As the legislation entered into force during the
course of the year, it contains specific rules for the
first year. Taxpayers who are not obliged to pay tax
do not have to file a tax return.
PKF COMMENT
The introduction of the new tax is in line with government policy aiming at shifting the focus to consumption
taxes when shaping the tax system and in parallel decreasing labour taxes. Under this policy, the rate of the
social contribution tax will be reduced from 17.5% to 15.5% as from 1 July 2020.
For further information or advice concerning the above or any advice with respect to Hungarian taxation, please
contact Krisztián Vadkerti at vadkerti.krisztian@pkf.hu or call +36 1 391 4220.
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PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 18India
Recent tax developments Act that a non-resident being an Eligible Foreign
Investor which operates in accordance with the
Section 115AD – Eligible foreign investors as Securities and Exchange Board of India, shall
under SEBI to be FII be deemed as Foreign Institutional Investor for
Section 115AD of the Income-Tax Act depicts the the purposes of transactions in securities made
tax on income of Foreign Institutional Investors (FII) on a recognised stock exchange located in any
from transfer of securities. International Financial Services Centre (IFSC),
where the consideration for such transaction is paid
or payable in foreign currency.
The Central Board of Direct Taxes (CBDT) has
provided an explanation to Section 115AD of the
PKF COMMENT
By providing the explanation, The Government of India intends to encourage foreign investment in India and
route the investments through the Securities Exchange Board of India (SEBI). As the investments are routed
through a reliable organisation like the SEBI it is expected to provide a sense of security to the investors and in
turn help to boost foreign investment.
Clarification on Residential Status calculation
for Individual for the FY 2019-20- Section 6 of the
Income Tax Act (the Act)
The CBDT has made amendments for the individuals
who were not able to leave India on or before
31 March 2020 due to the pandemic situation
in calculation of days of stay for the purpose of
ascertaining the residential status in India for the
Financial Year (FY) 2019-20.
On account of genuine hardship faced in leaving
India before 31 March 2020, the stay in India
from 22 March 2020 to 31 March 2020 shall not
be considered for the purpose of ascertaining
residential status in India.
PKF COMMENT
Consideration and relaxation given to business travelers amidst the pandemic situation by the Indian
Government comes in as a relief to the individuals in India.
PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 19India issued safe harbour rates for FY 2019-20 for arm’s length rates for certain specified
determining arm’s length price industries.Further, the Finance Act, 2020 had
The notification issued by the CBDT states that the amended safe harbour provisions in the
same rates as were applicable during the last three Income-Tax Act, 1961, to cover profit attribution for
financial years, i.e., FY 2016-17 to FY 2018-19, permanent establishments.
would be applicable for FY 2019-20, for determining
PKF COMMENT
This notification indicates that India is attaching importance to profit attribution on global transactions.
India amends Mutual Agreement Procedure country once the MAP application is filed in the
(MAP) rules for speedy resolutions country concerned. The Indian Competent Authority
The MAP application can be filed by the Indian shall then convey its acceptance or otherwise for
resident, aggrieved by the action of the tax authority taking up the case in MAP.
of any other country outside India. Application is
required to be made in a prescribed Form The new procedure for giving effect to MAP
(Form 34F). resolution is proposed to ensure timely closure of the
cases resolved under MAP.
The Indian Competent Authority shall receive a
reference from the competent authority of the other
PKF COMMENT
The new rules try to make the MAP process more efficient and time bound. It is expected that these rules would
lead to speedy settlement of taxpayers’ cases.
Key rulings The question whether income from composite
software and maintenance services constitutes
Paradigm Geophysical Pty Ltd vs. CIT (Delhi Tribunal)
“royalty” for purposes of s.44DA would have to be
Income from provision of services through high end
decided based upon the nature of services.
customised software does not constitute “Fees for
The assessee is eligible to take benefit of the
Technical Services”, u/s 9(1)(vii) as the definition
definition of ‘royalty’ as per the double tax treaty
excludes income from “mining or like project”.
(DTT) for the purpose of applicability of s.44DA.
PKF COMMENT
The Tribunal showed the importance in ascertaining the nature of fees to determine the tax rates. Accordingly,
Article 12 of the India USA DTT was considered, and the transaction was taxed as royalty. The Tribunal further
dismissed the contention of CIT(A) that the fees attributable to PE are taxable as business income under Article
7. However, considering that this is a tribunal ruling and it may be further deliberated at the higher judicial level.
PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 20UOI vs. U.A.E. Exchange Centre (Supreme Court) carry on activities of preparatory or auxiliary nature Taxability of Liaison Offices under DTTs: The only. A liaison office which is only carrying on such activities carried on by the liaison office of the activity of a “preparatory or auxiliary” character non-resident in India as permitted by the RBI, is not a PE in terms of Article 5 of the DTT. The demonstrate that the liaison office must steer away deeming provisions in Sections 5 and 9 of the from engaging in any primary business activity and Income tax Act can have no bearing whatsoever (all in establishing business connection as such. It can important judgements referred). PKF COMMENT The Hon’ble SC, in the case under consideration, has observed that considering stringent RBI conditions provided in a liaison office approval, the approved activities were preparatory and auxiliary in nature. This ruling comes in as a relief to liaison offices in India. PILCOM vs. CIT (Supreme Court) Source u/s 194E is not affected by the DTT. In case TDS u/s 115BBA, 194E & DTT: As the payments to the eligibility to tax is disputed by the recipient, the the Non-Resident Sports Associations represented benefit of DTT can be pleaded and the amount in their income which accrued or arose in India u/s question will be refunded with interest. However, that 115BBA, the assessee was liable to deduct Tax at by itself, cannot absolve the liability to deduct TDS Source u/s 194E. The obligation to deduct Tax at u/s 194E of the Act. PKF COMMENT This ruling lays down the principle that withholding tax obligation under Section 194E of the Income Tax Act is not affected by taxability under the DTT. Hence, it would be prudent for taxpayers to consider the impact of the local laws while making payments to non-residents. If you believe the above measures may impact your business or require any advice with respect to india taxation, please contact Sudha Ashok at sudha.a@pkfindia.in or call +91 44 2811 2985. »BACK Italy Nautical charter services: VAT territoriality The Revenue Agency has recently published a draft of the measure concerning the so-called “adequate means of proof” with regard to the non- EU navigation of pleasure boats used for leasing (including financial) and chartering. PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 21
The aim of the measure is to identify the methods • documentation proving the mooring of the
and means to demonstrate the effective use outside recreational craft in ports outside the European
the EU territory of “short-term nautical charter” Union, such as invoices, contracts, tax receipts
services (as per art. 7-quater, paragraph 1, letter ‘e’ and related means of payment
of Presidential Decree no. 633/72 on VAT), i.e. those
• documentation proving the purchase of goods
contracts that provide for the continuous possession
and/or services, in commercial establishments
or use of pleasure craft for a period not exceeding
located outside the European Union, relating
90 days.
to the use of the recreational craft outside the
European Union, such as invoices, contracts, tax
In particular, it seems that only the test methods receipts and related means of payment.
used up until now, represented by the lease, charter
and other similar (short-term) contracts, normally Furthermore, it is expected that the supplier and
accompanied by the declaration made by the user of user of the boat will be obliged to keep all the above
the boat under his own responsibility, are no mentioned documentation (to be made available in
longer sufficient. case of request by the Financial Administration) for a
period of 10 years starting from the year in which the
In fact, the Agency specifies that these elements will use of the boat started.
have to be supported by further specific “means of
proof”, differentiated according to whether they are We are therefore moving towards the archiving of the
“pleasure boats equipped with satellite navigation system of the so-called “presumed use percentages”
systems” or “pleasure boats without satellite of pleasure craft outside EU waters, which has also
navigation systems”. earned Italy an infringement procedure.
In the first case, reference shall be made to the
information extracted from the satellite navigation
systems or transponders (such as A.I.S., “Automatic
Identification System”), which shall indicate the sea
distance carried out by the vessel.
In the second case, (units without satellite navigation
systems) it will be necessary to show at least two of
the following means of proof:
• paper or digital navigation logbook or
logbook data
• digital photographs of the Vessel Point for each
week of navigation identified by any device and
recorded at a frequency of at least two for each
week of navigation
PKF COMMENT
We focused on this matter because in Italy (and especially in a seaside city as Genova) there are a lot of foreign
VAT registered companies with an Italian tax representative that provide this type of services.
If you believe the above measures may impact your business or require any advice with respect to Italian
taxation, please contact Stefano Quaglia at s.quaglia@pkf-tclsquare.it or Matteo Macciò at m.maccio@pkf-
tclsquare.it or call +39 0108 183 250.
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PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 22Jamaica
2020 tax updates
In March 2020, a range of revenue measures
aimed at stimulating and growing the economy
were introduced for 2020/2021. These are Reduction in the standard rate of General
summarized below: Consumption Tax (GCT)
Effective 1 April 2020, the standard rate of GCT was
• Reduction in the standard rate of General decreased from 16.5% to 15%. The other rates of
Consumption Tax (GCT) from 16.5% to 15% GCT applicable are 25% on telecommunications
• Reduction in the rate of Assets Tax for Specified services and handsets and 10% on tourism activities
Regulated Entities from 0.25% to 0.125% licensed by the Tourist Board.
• MSME Income Tax credit in the amount of This reduction in the standard rate follows on from
JMD 375,000 the increase in the GCT threshold for registration to
• Reduction in JACRA/Trade Board Fees. ten million dollars ($10M) effective 1 April 2019.
PKF COMMENT
The combination of the two measures, namely the increase of the income threshold to ten million dollars
($10M) and the reduction of the standard rate of GCT, were intended to encourage growth in the economy but
the impact of COVID 19 has been devastating. It is hoped that the economy will rebound soon, as the country,
and the world at large, are slowly reopened for business.
Reduction in the rate of Assets Tax for Specified regulated entities are therefore still
Financial Institutions required to file their Assets Tax declaration and settle
For year of assessment 2021, the assets tax payable the assets tax payable. It is to be noted that this tax
by specified regulated entities, namely financial is not a deductible expense and it has to be passed
institutions and insurance companies, will be on to customers of these entities, resulting in high
reduced by fifty percent (50%) from 0.25% interest rates and financial fees
to 0.125%.
PKF COMMENT
The assets tax was abolished for non-financial institutions in 2019 and its reduction by fifty percent (50%) for
specified regulated entities is welcomed. The Finance Minister has indicated that the assets tax is unproductive
and distortive. It disincentivizes these entities from creating assets and encourages those who are able to,
particularly international firms, to shift their assets outside of Jamaica to avoid the assets tax. It is hoped that
this assets tax will be abolished in the near future.
PKF WORLDWIDE TAX UPDATE | SEPTEMBER 2020 23You can also read
